Borrowing to invest, or gearing, can be a powerful means to build wealth. It allows you to increase your ability to build wealth by enabling a higher level of investment than would otherwise be possible. You can either positively gear or negatively gear.

The Benefits of Gearing

  • Enables you to undertake a higher level of investment than may otherwise be possible
  • In favourable market conditions, your earnings can be mutliplied.
  • Generally, if the cost of borrowing exceeds the income generated from the investment, this excess is an allowable deduction.
  • If you borrow to invest in shares you may obtain imputation credits which can be used to reduce the amount of tax you pay.

The Risks of Gearing

  • An asset may not provide the expected return
  • The market conditions under which you are borrowing may change. If you over-borrow, rising interest rates could restrict your ability to meet the loan payments.
  • If you rely on the income from the investment/s, there may be periods where it produces little or no income, or even losses.
  • Gearing can multiply your loss.

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